Examination of Witnesses (Questions 182-199)
MR JONATHAN
HODGKIN, DR
TONY BALLANCE,
MR PETER
ANTOLIK AND
MR RICHARD
AYLARD
8 JUNE 2009
Q182 CHAIRMAN:
In the remaining minutes that we have left, let us move quickly
to look at one or two issues as far as the Draft Flood and Water
Management Bill is concerned. Sir Michael Pitt in his excellent
report made it very clear that what he wanted to see was a Bill
which, if you like, consolidated existing water legislation, took
into account the recommendations of his report, took into account
Cave, Walker and other matters, and produced a genuinely comprehensive
Bill dealing with the future of the industry. Because of the vagaries
of the Parliamentary timetable, it may be that the Bill could
be introduced in a piecemeal fashion. Which would you prefer?
MR
AYLARD: If it
were a choice between not having a Bill or doing it piecemeal,
we would be happy to do it piecemeal. There has not been primary
legislation for some time.
Q183 CHAIRMAN:
Which bits on a piecemeal basis would you have? What are the main
things in order of priority?
MR
AYLARD: Our
priority would be sustainable drainage—that is the SUDS—and
related to that the right of developers to connect their surface
water drainage to our sewers, which is a major problem that needs
to be resolved. We would also like to look at the issue of misconnections.
There are a lot of houses, possibly up to one in ten in the Thames
Water area, where their foul drainage is connected to the surface
water drains, and then goes into rivers. That needs to be sorted
out. We would also like to tidy up the regulations about water
restrictions during a drought while it is reasonably fresh in
people's minds from the 2006 drought; we would like to get that
done. There are two other things which are not in the Bill but
which we think would be important to be in there. The first thing
is the issue of bad debt and, as was mentioned earlier, the need
to be able to chase a named individual rather than a nebulous
person called "the occupier" who is obviously difficult
to track down. The final one is the special merger provisions,
which basically set a much tougher test for mergers between water
companies than other utilities. We are in with defence of the
realm and plurality of the media, which we think makes no sense.
Q184 CHAIRMAN:
It does not sound too piecemeal. It sounds like a major piece
of water legislation in its own right, taking quite a long time.
MR
AYLARD: There
are quite a lot of things that were in the Bill that are not in
that list. Those would be our priority areas. I do not know if
the other companies would have a view on that.
DR
BALLANCE: I
think the same. Certainly we would have a similar list. From our
perspective, obviously, learning lessons from the flooding that
we experienced in 2007, that is where you would expect the focal
point of the new legislation to be if it had to be done in a piecemeal
fashion, so the things that Richard referred to at the start of
his description I think would be the ones that we would find critical
and important to get on with in this current environment.
Q185 CHAIRMAN:
And Yorkshire?
MR
HODGKIN: I am
going to broadly agree with that but, if I may, add one thing,
which is we already mentioned the possibility of looking at the
role companies might play in relation to supply pipes. Thinking
about SUDS, we welcome the proposal but for that to work effectively,
it relies upon local authorities being willing and able to adopt
and maintain and operate those facilities to the necessary standard.
That will take technical resources and financial resources, and
there is no certainty that that will be available. An alternative
approach and one which, again, it would be useful to maybe consider
as the Bill develops is whether water companies themselves should
have a greater role in terms of providing, operating and maintaining
SUDS to ensure that these things actually deliver the promise.
Q186 CHAIRMAN:
Just a minor point, but with SUDS are those remarks made in a
prospective sense, in other words looking at developments that
are yet to come, or in a retrospective sense of saying SUDS may
be an alternative to current technology, we should look at retrofitting
them?
MR
HODGKIN: I think
we are looking forward, to be honest, rather than going backwards
and trying to re-create something that was not there in the first
place.
Q187 PADDY
TIPPING: Why should local authorities
do this work when you are the guys that have got the experience?
MR
HODGKIN: Indeed.
Q188 PADDY
TIPPING: Why are you not taking
the responsibility?
MR
HODGKIN: Certainly
the Bill proposes that local authorities should take on that responsibility
and they will need funding to do that. It is important for all
of us that that is done well. An alternative model would be for
water companies to take on that role and for water companies to
recover the costs of that activity through water charges. That
might lead to more effective delivery. It would have implications
obviously for water prices, but I think that is something worth
exploring as to whether that would be a more robust way forward.
Q189 PADDY
TIPPING: You are on the fence
on this, are you not?
MR
HODGKIN: No,
we are very early days. I can see there certainly would be some
benefits for it but when you see Ofwat on Wednesday you can ask
them whether they think that is a good idea. They will have questions
about that, I am sure, so there is more work that we would need
to do to understand how that would work.
DR
BALLANCE: If
I might add, certainly in our response to the Pitt Review we thought
it should be water undertakers who would take that responsibility
because we know the systems that we are operating and potentially
we have access to the resources, ie the finance to put the money
in, albeit that that would be recoverable through water charges,
but at least there is a mechanism for recovering those costs.
Q190 PADDY
TIPPING: Let us just talk about
the EA for a minute. They are going to be key players into the
future and when Water UK wrote to us they were anxious about data
sharing between yourselves and the EA. You are private companies,
you are not used to data sharing; is this an issue?
MR
AYLARD: Not
really. We need to think very carefully about it and we need to
make sure the people we give the data to protect it as well as
we would protect it. We also would potentially be giving data
to, in our case, 96 local authorities so what we are doing is
a trial based in Thatcham and Kingston where we are working with
the local authorities to work out exactly what kind of package
of data we could give them so that we would have a standard way
of doing this and they would have a standard means of protecting
it. It just needs thinking through in process terms.
Q191 PADDY
TIPPING: I am struggling with
this a bit. What kind of data is this?
MR
AYLARD: For
instance it is maps, where are the sewers, where are the drains,
how big are they, where are the pumping stations; it is that sort
of information.
Q192 PADDY
TIPPING: Again Water UK suggested
a way of tackling this is to look at section 52 of the Water Act
2003 and transport that into the new Bill.
MR
AYLARD: I am
afraid you have lost me. I hope you have not lost my colleagues
as well.
MR
HODGKIN: I do
not have the detail but Water UK is working with the EA on a data
sharing protocol to get a smoother transfer of data. I guess a
practical way forward would be to consider how that protocol could
be extended to local authorities as well. The fact is we are not
professional data providers so clearly there are issues for us
in how we do that.
Q193 CHAIRMAN:
Can we move on to one part of the Bill which deals with what is
described as the water administration regime, which seems to be
a mechanism whereby the law would be changed to put in a rescue
system if water companies got into financial difficulties. Just
refresh my memory as to the situation now, not that I would hope
in any way, shape or form that your respective excellent companies
should run into difficulties, but if you did, for argument's sake,
go into administration and you could not carry on trading, what
happens today?
MR
HODGKIN: I do
not think any of us are expert in that field, although we can
provide the back-up data to help you with that but, in principle,
what would happen is that Ofwat would appoint another company
to operate our business instead of us.
Q194 CHAIRMAN:
The reason I ask that was I was trying to get an understanding
as to why the Bill feels it necessary to amend the procedure you
began to touch on, and what you thought about the proposals in
the Bill that dealt with that, because I was going to go on and
ask a question about whether in fact the regulator has any duties
to keep an eye on what you are doing under the present arrangements,
in other words, to see that you are being run in a fit and proper
financial manner so that you would not get in the first place
into a situation where you might go out of business because if
you have got provisions that send in the rescue services it is
like bolting the stable door after the horse has gone.
DR
BALLANCE: Indeed,
there are quite a lot of provisions under the legislation for
that to happen. Most notably there are ring-fenced conditions,
so-called, in the licence that effectively secure the finances
for the core water sewerage undertaking and which mean in the
case of a parent company going bankrupt that the monies for running
the undertaker are there. That happened in the case of Wessex
Water when Enron went bankrupt many years ago that Wessex Water
was able to carry on functioning because it had adequate monies.
I think it is quite right and proper that obviously from time
to time one looks at the special administration around this whole
area. If a company were to get into financial difficulty then
Ofwat appoint this special administrator to come and, in effect,
take over the operations of the water company and obviously that
is an area that is being looked into in terms of whether those
provisions are actually as good as they could be. That is why
this has been suggested for the Flood and Water Management Bill.
Q195 CHAIRMAN:
I think it might just be helpful because it is quite a technical
area.
DR
BALLANCE: It
is indeed.
CHAIRMAN: Perhaps
you could have a look at it for us. I suppose my first question
is are these powers really required and, if so, why because somebody
has obviously thought that the current regime is found wanting
and that is why they want to put it in the Bill, but it is not
clear to me why. I have not seen the evidence to say why that
should happen. If you could write to us on that it would be good[9]14
and I will pass on to Paddy who wants to ask you some questions
about reservoirs.
Q196 PADDY TIPPING:
Perhaps Yorkshire Water will help me with this because you have
had a lot of experience in recent years. The Bill changes the
1975 Reservoirs Act. What discussions took place with Defra around
these proposed changes?
MR
HODGKIN: We
have not been party to a discussion about that. We have had an
opportunity to speak to the Bill team towards the end of the drafting
process to hear, if you like, how the Bill was coming along but
we have not really been involved in the development of those proposals.
It would be fair to say that we have a number of questions about
them therefore as to quite what their impact will be and how they
will work in practice.
Q197 PADDY
TIPPING: Spell that out for us.
MR
HODGKIN: We
currently have 139 reservoirs. Based on the definition of a reservoir
in the Bill, which itself is slightly vague, we could have another
50 per cent more counting as reservoirs, but we do not quite yet
know until we know precisely what the threshold is. Quite what
is included is one question and how many. Then the issue is one
of resources in terms of engineering resource to look after those
reservoirs. There are only so many engineers available who are
already very stretched. We reckon overall for the country we could
be going from 2,000 to 5,000 reservoirs with roughly 100 to 150
Supervising Engineers, so the challenge in terms of doing their
role properly over a much expanded reservoir base raises questions
as to how will that be done. As currently drafted we would be
required to provide quite a lot of information and plans for what
to do if things go wrong, if I can put it in those terms, for
all reservoirs, whether they are high or low risk, and we think
it will be more sensible to first of all work out which of the
reservoirs are high risk and then do the detailed work on the
high risk rather than doing it for all of them, so there are some
questions. We do not have a problem with the principle of focusing
in a risk-based way but the detail is just a little bit hazy for
us at the moment.
Q198 PADDY
TIPPING: When the Environment
Agency came to see us they said there should be an emergency plan
like you have with a chemical plant if things go wrong. What is
your view on that?
MR
HODGKIN: I think
that would be appropriate for high-risk reservoirs and I think
that is the challenge, let us work out the high-risk ones first
and then do the emergency planning rather than the other way round.
Q199 CHAIRMAN:
Let me ask you, you are all companies that have to have insurance
for contingencies, and I imagine that your insurers will themselves
have worked out the risk of reservoir failure and the premium
that you are charged will reflect what your insurer thinks the
risks are and they will work out what all the risks have to be.
Again, let me just ask the question, given that there is a financial
penalty for you guys if a reservoir goes bang and there is a serious
inundation of water, eventually your premium is going to almost
become untenable so you have got to look after your reservoirs.
Do we actually need a change in the law?
MR
HODGKIN: That
is a good question. The change in the law is helpful insofar as
it is moving from a situation where all reservoirs have a consistent
level of scrutiny to one which focuses on, in theory at least,
higher risk reservoirs so I think that is a step in the right
direction. I take your general point, irrespective of insurance
we have no interest in any of our assets failing and causing our
customers problems. That is not how we intend to run our business.
CHAIRMAN: David,
we have touched on SUDS so I think we might just move on.
MR DREW:
I am doing licensing.
CHAIRMAN: You
carry on and do licensing then.
Q200 MR
DREW: Just a quick thing on licensing
because I do not think you need to go into this in enormous detail
and we have not got time. I am a little bit confused as to the
degree to which this is easy to legislate for because licensing
is a hugely complex issue. Let me just ask a couple of specific
questions initially to Dr Ballance from Severn Trent. You have
certainly expressed some concern about the ability of Ofwat to
alter licence conditions virtually without any negotiation. Give
us an example of something you really fear, a real live example
of a licence change that you think this could happen and this
would be just unfair to us?
DR
BALLANCE: I
think it is difficult to be very specific but I think the circumstances
could be—
Q201 MR
DREW: Let us take an abstraction
licence?
DR
BALLANCE: No,
I think the changes that are envisaged are more in terms of the
licence of appointment for the water undertakers which governs
the way in which Ofwat works. It is not the abstraction licensing
system per se. The new powers that are envisaged in the Flood
and Water Management Bill relate to the ability of Ofwat to put
standard licence conditions through for the industry which would
represent a change in the way in which licence changes are governed
at the moment, whereby if we do not like a certain licence change
then we can appeal that to the Competition Commission who decide
whether that is in the public interest. There is reasonable protection
for our licence, which obviously investors perceive as a good
thing because if Ofwat set our prices, they have got certainty
around the revenues. It is difficult to think of specific examples
of where Ofwat might want to change something. We are not necessarily
completely against it but one needs to see the details of how
this will work. It happens in the electricity sector where if
there is a majority of the turnover of the sector then Ofgem can
change the standard licence conditions and that seems to work
well. The fear would be that if it is not applied in a similar
way as to how it is done in the electricity sector that it would
give Ofwat more power than it has to change the way it wants to
see us regulated, which could be in terms of the prices that were
set or the output that we are required to deliver and that therefore
could be quite a fundamental shift in the way in which we are
regulated.
MR
ANTOLIK: May
I pick up a quick follow-up on that. Licences affect the revenue
and the output and so on and the risk that the company takes,
and the real issue here is potentially one of, subtlety but importantly,
changing the risk that shareholders and other investors take when
they invest in companies. If changes can happen to the company's
operating environment through the licence which they were not
expecting and which apparently are done without the company's
consent and without due right of appeal, that is quite an important
shift for investors if they think they have a protection there
through a right of appeal and that suddenly goes. To pick up on
energy, I understand that it is an 80 per cent majority that is
required to make the licence change in energy and the proposal,
as we understand it, is possibly a simple majority in water and
that is quite different. Interestingly, there was no prior consultation
that I am aware of with the industry as to whether this should
be introduced.
Q202 MR
DREW: I know Mr Aylard, Thames
have got particular problems with the draft recommendations. You
expressed very precise concerns, can you just explain?
MR
AYLARD: We are
both from Thames and we are genuinely alarmed by this because
when investors buy a company or invest in it, they look very carefully
at the risks they are taking. They look at exactly what they are
taking on and exactly what they are required to do by these licences.
If they can be changed by a simple majority of companies without
any recourse of appeal that substantially increases the potential
risk that investors are taking. Whenever investors or shareholders
see a risk they put the price up and that has got to be bad for
customers, so we cannot see why we cannot keep the right of referral
to the Competition Commission to say, "Excuse me, we do not
agree with this," and then get it looked at in the public
interest.
CHAIRMAN: We
will be taking up with you in correspondence the parts of the
Bill clauses 239 to 241 which deal with financing of large projects
and we have some questions there that we would like to ask and
also about the question of construction standards for sewers,
but can I thank you all first of all for your written evidence,
that was very helpful to the Committee, and thank you for the
crispness and focus of your answers this afternoon in your oral
evidence, and thank you all very much for coming before the Committee.[10]
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